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Groupon: Ripe for Contrarians

It's been all of eight months since Groupon went public, but apparently investors are demanding profits -- now!

Some companies just can't seem to catch a break. After the initial warm and fuzzies Groupon(Nasdaq: GRPN) enjoyed immediately following its IPO in November, investors and analysts have beaten the stock to a pulp. After the recent sell-off, Groupon shares are trading at all-time lows, apparently on profit concerns.

Profit concerns? The company is in its infancy, is growing customers exponentially here and abroad, yet the Street is demanding profits today? If there are any contrarians in the house, this one's for you.

A different set of rulesUnder normal circumstances, an Internet start-up with a sound business model is measured differently from an established company. When LinkedIn, Netflix(Nasdaq: NFLX)and the like went public, no one expected immediate profits, nor should they have.

Remember the Netflix announcement of a billion hours of customer viewing in June? The stock has climbed about 17% in the past week as a result. Do those streaming hours directly equate to profits? Nah, but shareholders recognize that the company is growing and that all those hours reflect that growth, and so the stock soars. So why can't Groupon catch a Netflix-like break? If you're a risk-tolerant investor who doesn't mind living a little of the contrarian lifestyle, check out the numbers I'm about to roll out and be thankful it can't get any love.

A few specsYou'd think a gander at Groupon's first-quarter results would have been enough to quell at least some of the market's concerns. No, the company didn't generate profits in its first full quarter of public ownership. But it grew, and grew big-time.

Revenues in Q1 jumped nearly 90% year over year to $559 million and change. The company billed its customers $1.35 billion, more than twice that of a year ago. Want more? Excluding a one-time charge of $28 million, Groupon's operating income in Q1 skyrocketed to $67.6 million, and cash flow was through the roof.

The 75% increase in North American revenues should have been a real eye-popper, too. Reviewing the financials, you get the sense that even CEO Andrew Mason was pleasantly surprised. Much of the increase was attributed to the SmartDeals technology that allows Groupon customers to personalize their deals. Groupon Rewards and Scheduler are also picking up steam, helping grow the company's active customer base to nearly 37 million, setting yet another record. And if the international rollout of the new slate of technology goodies (expected by year's end) hits the mark the way it has here at home, growth overseas will continue to improve.

Also worth noting is Groupon's $1.16 billion in reserves along with no long-term debt. Nada, zip, zero. For an early-stage Internet growth firm, that's an impressive pile of cash, particularly without the debt load you'd expect to go along with it.

Sure ,the company lost money in Q1 -- $0.02 a share vs. $0.48 last year -- but it was Groupon's first quarter as a public company, for heaven's sake. Cut it a break.

Legitimate concernsThe global economic uncertainties will continue to affect international sales, which currently account for about 57% of total revenues. Though to its credit, even with significantly higher expenses in Q1, Groupon still generated positive operating income overseas.

When you're the first significant player in a market, as Groupon was, growing isn't difficult. The problem with all that growth is others start taking notice, and that means competition. In Groupon's case, some heavy-duty players are meandering around the neighborhood. Google(Nasdaq: GOOG) and its Offers product is certainly worth keeping an eye on, especially after the recent release of an iPhone app. And Amazon.com's (Nasdaq: AMZN) investment in LivingSocial makes the No. 2 player in the market an even bigger threat. In just three years, LivingSocial has grown to nearly 5,000 employees and conducts business in 20 countries around the world.

The bottom lineGroupon's stock is getting pummeled and short interest is skyrocketing, so what's an Internet growth company to do? In my opinion, the only thing left for the company and its shareholders is to ride out the negative market sentiment. Netflix? LinkedIn? They got the benefit of the doubt. No such luck for Groupon.

But if you're a contrarian in search of an aggressive growth opportunity, don't forget Groupon's first quarter. With that in mind, the recent decline on "profit concerns" makes it worth a serious look.

New Internet growth companies offer a lot of upside. But like Groupon and others in a similar growth stage, there's no such thing as too much research. With that in mind, take a look at another tech-related growth stock idea in our free special report, "Forget Facebook -- Here's the Tech IPO You Should Be Buying."

Author

Tim has been writing professionally for several years after spending 18 years (Whew! Was it that long?)in both the retail and institutional side of the financial services industry. Tim resides in Portland, Oregon with his three children and the family dog.